Rather than engage in a point/counterpoint, here are some thoughts on my favorite investment:
Tesla had 455,000 paid-for pre-orders as of a month ago, increasing at the then rate of 1800/day. This is astounding - completely unprecedented in automotive history. What other car comes within an order of magnitude of this? Only Model S.
Tesla is ramping up to sell 500,000 cars next year. To put that into perspective, it took Nissan 7 years to sell half that number of cheaper Leafs worldwide, and 6 years for Chevy to sell under 100K Volts. Musk believes that steady state demand for Model 3 is about 700K units a year.
Tesla had about $7 Billion in revenue last year. Tesla’s 2018 expectation of 500K cars (Model S, 3, and X) at an ASP of 45K is $22.5 Billion, 4 times as large. That’s a lot of cash flow. Yeah, Tesla will find ways to spend that money (Model Y, Semi-trucks, Gigafactories), but if they want to show a profit, they’ll easily be able to.
The entrenched Automotive OEMs are innately unable to compete. I’ve worked with people who have worked at American, German, and Japanese OEMs. First, the companies are structured to be conservative and avoid mistakes. A failed model is an expensive failure (high up front costs and low margins), so everything is setup to avoid that. Committees review everything, and execs review the committees. They take their time doing anything and everything. In Silicon Valley, working on a failed project or for a failed company shows you were willing to take a risk and do something new. In the automotive world, it’s the kiss of death, so no-one sticks their neck out for anything.
And that’s without even talking about the profit their dealers take, which Tesla gets to keep. And in terms of buying experience, it took GM about 5 minutes to decide to close Saturn down. The recession was the excuse they had been looking for for years.
Even famous Tesla valuation critic Aswath Damodaran says that Tesla: “is blessed with the worst competition on the face of the earth. The automobile business is full of badly managed, badly run companies.”
And that’s before realizing how hard it is to change-over a big company with established products and now out-dated infrastructure. Even companies that want to make the change will have a tough time. Volumes start too low to matter to them. They lose not only first mover advantages, but don’t gain the years of experience working with the new technology. It’s structurally difficult to switch over. For instance, Mercedes just announced that they can go electric, but that it’ll hurt their profit margins considerably. Will Mercedes stock holders tolerate very low profits for the half decade or more that it’ll take to complete the change-over and then be profitable again? Probably not, which will make raising money to fund the effort that much harder.
Tesla has a huge moat with their SuperChargers. If you’ve actually thought about buying an EV as your only car, which means even some road tripping, your choice is between Model S and X and now 3. That’s it - all Teslas. Just thinking the SC network up was totally out of the boxing thinking. Today, what’s startling is that other companies only build chargers when forced to. NRG was fined in 2012 by CA, and the penalty was to spend $100 Million on EV chargers (they since sold the charges to EVgo). Similarly, VW is spending $800 Million on chargers as partial fines for diesel-gate. But, there are no cars that have those locations programmed into their Navigation systems to route you on long distance trips, not to mention that can also tell you whether they’re in use or not. And, don’t forget Tesla’s chargers are the fastest in the world. Chademo tops out at 50kW, J1772 “FrankenPlug” at 90kW (if any actually exist at that capacity with any cars that can handle that, which I doubt), while Teslas can routinely do 120kW.
And all this is before even considering Tesla Energy, which many at Tesla believe will be even larger eventually. It’s literally as if Tesla’s plan is to use EVs simply to create demand for its energy products! Why else do you think they encourage competition and give away their patents? Because more EVs means more Tesla Energy sales!
OK, so yeah, I can get too enthusiastic. But, when I read people “worried” about 455K pre-orders, I’m astounded at the lack of recognition of what’s really going on - compare that to less than 2K sales of Bolts each month. And when I read that people are thinking that the entrenched automotive OEMs are actually going to compete at Tesla’s level, it makes me laugh. If that’s what you believe, you need to read Clayton Christensen’s “Innovator’s Dilemma,” especially the bit about the steam excavator companies competing with upstart hydraulics. Even the steam companies that went to steam/hydraulic hybrids (some familiar?) went bankrupt. In the end, every one of the steam companies went out of business. Every. Single. One.